CRE Forecast 2012: Cautious Optimism to Guide U.S. Markets

Canadian real estate services company Avison Young's annual CRE forecast gives U.S. owners and investors a reason to celebrate—in moderation. The report, which covers the office, retail, industrial, and investment markets in 20 U.S. and Canadian metropolitan regions (Atlanta; Boston; Chicago; Dallas; Houston; Las Vegas; Los Angeles; Washington, D.C.; Calgary; Edmonton; Halifax; Lethbridge; Mississauga; Montreal; Ottawa; Quebec City; Regina; Toronto; Vancouver; and Winnipeg) shows a United States suffering from ongoing uncertainty, but with good news concentrated in a few select markets. Meanwhile, Canada saw stability and growth in 2011 despite global economic uncertainty.

However, the report predicts better days ahead for the United States as the world deals with its financial issues. “There is a dichotomy in the North American commercial real estate market. Canada is experiencing a period of stability and modest growth, while the United States continues to search for traction in the recovery process,” Mark E. Rose, Chair and CEO of Avison Young, said in a statement. “Despite this disparity, things are looking up in both countries as global financial uncertainty is gradually resolved and clarity begins to emerge,” he says. “As Europe and the U.S. take steps to deal with their economic challenges and financial markets begin to rebound, there will be opportunities for commercial real estate markets to make further gains,” Rose added.

According to Rose, 2011 saw solid demand in both countries' investment markets, with a large pool of buyers driving the market in Canada, and U.S. buyers focusing on safe assets and avoiding risk. “Given the relatively small investable universe in Canada, we continue to notice a growing trend of Canadian buyers heading south of the border,” notes Rose. And it seems that a number of Canadian buyers, including pension funds, life insurance companies, and real estate investment trusts (REITs), are identifying opportunities to expand their portfolios in and beyond Canada's borders, especially into the United States. While U.S. assets are currently available at more attractive pricing, their value is expected to rebound in the coming years, making them a good longer-term hold and convincing many real estate investors that this is the time for cross-border deployment of capital, the forecast noted.

The report notes that in Canada, confidence remains high coming off good results in 2011, and as long as businesses and consumers remain motivated by the underlying fundamentals and not the headlines, the country's markets can anticipate ongoing improvement. Meanwhile, progress is slower and unevenly distributed in the U.S., with recovery struggling for a foothold as caution prevails. “2011 was a year of sporadic recovery in the U.S., with strong capital flows and historically low interest rates. Market recovery was best seen in a handful of larger coastal markets, while widespread caution persisted and many businesses deferred real estate decisions,” noted Earl Webb, Avison Young's President, U.S. Operations. Webb said for 2012, real estate remains an attractive investment and, after a slow start, the U.S. will experience increased sales volume in the coming months.

The report predicts more stabilization for the retail sector in 2012, with development stalled in most cities until the economy further improves. Among the forecast's findings on U.S. real estate:

• Although modest, office absorption increased slightly in many markets in 2011.

• Nationally, the office vacancy rate dipped to 12.5 percent in 2011 from 13 percent in 2010.

• Chicago witnessed the largest decrease in vacancy, while Boston and Las Vegas witnessed small upticks in their vacancy rates, and Dallas, Los Angeles, and Washington, D.C., experienced vacancy declines.

• While the overall U.S. retail vacancy rate came in at 7 percent in 2011, a few markets remained stable over the year. Notably, Houston is witnessing a slow retail turnaround and reduced vacancy, leading to major retailers planning future expansions, and Boston witnessed several national retailers filling vacancies left during the recession.